Arizona’s largest retirement system is facing unfunded liabilities that are more than $14 billion. The costs of dealing with this perpetual pension debt just keep growing.
The funding shortfall of the Arizona State Retirement System (ASRS) has been accumulated over the past two decades. Back in 2002, ASRS was actually overfunded, with a $1 billion surplus. But since then pension debt has been steadily growing. And this has triggered a sharp increase in the amount of money that needs to be paid into ASRS — from the state, local employers, and employees.
In fact, the amount of money required today from employee paychecks and government employers has more than quintupled since 2001. Back then the total contributions were 4% of payroll — 2% from employees, and 2% from their employers. This year public workers in Arizona and their employer are paying 11.94% of pay, each.
What is Causing This Problem?
Why? Some of the usual suspects are overly generous benefits, or governments not making their required contributions. However, the size of ASRS pension benefits has not increased since the 1990s. And Arizona’s government agencies have consistently paid their required pension bills each year.
The primary source of the ASRS funding shortfall is that investment returns have not been as high as expected. This problem started before the financial crisis. It was exacerbated by the Great Recession. And in the decade since then, even as financial markets have fully recovered from their low points in 2008-09, ASRS has actually added more pension debt.
Who Should Be Concerned?
For individuals who have spent a full career participating in ASRS, this level of underfunding is really disconcerting. While the state constitution explicitly prohibits the government from cutting pension benefits, it is unclear to the typical employee or retiree how the state will be able to handle paying off this pension debt. Retirees continue to receive their monthly pension checks and currently are not at risk of getting a reduced payment. Still, the size of unfunded promised benefits is worrisome.
The concerns are slightly different for those who are still in the midst of their careers working in the public sector. Ever growing contribution rates are cutting into their take home pay, and to the typical ASRS member there isn’t a clear reason as to why.
The increased contribution rates may be tolerable for some ASRS participants — after all, the promise of guaranteed lifetime income is a strong retirement benefit that is not available from most private sector employers. But as it turns out, far fewer people wind up earning an adequate pension than would be expected for such a large, statewide retirement system. As we highlight in this paper, research compiled from three separate organizations shows that less than 20% of teachers, state workers, and municipal employees in Arizona are earning a full pension.
What Should Be Done?
With more than 220,000 active members in ASRS, and just as many individuals who worked in an ASRS-covered job but have since left public sector employment, this means there are tens of thousands of individuals who are not on a path to retirement security.
Ultimately, the Arizona State Retirement System is an important component of compensation for public sector workers. It works for some teachers, state workers, and municipal employees, providing retirement security that should be respected and protected. That respect and protection should come in the form of an increased effort to get ASRS pension debt paid down quickly, while also looking closely at the growing contribution rates for active employees. But since it does not work for all participants, Arizona leaders should also ensure that ASRS is providing retirement security for those members as well.
Check out the full paper to learn more about:
- The perpetual growth in contributions for public sector workers in Arizona over the past two decades
- The primary causes of funding challenges for ASRS
- The details on which members of ASRS actually have a path to adequate retirement security
- A framework for improving the sustainability of ASRS and its capacity to provide retirement security